Day by day, the case for a top grows stronger

A market that ignores buy signals is a weak market. We continue down where we would have rallied during the past 6 months. The swiftness, uniformity and persistence of this decline hint that it is the start of a big one.

At the moment, I’m fairly neutral on stocks, since I don’t feel I have an edge either way. I would love a rally to lever up short again, but of course the market doesn’t owe us good entries. It often makes a point of leaving the bears in the dust at major turns.

Here’s the decline so far:

Source: prophet.net

RSI is not offering the bulls much hope. This is a grinding decline – each rally just goes far enough to reset things for a new low. Bearishness is nowhere near an extreme, so there is no support there either. As I have been thinking for some time, this decline shouldn’t find a rally of more than a few days until it has shaved 10% off the Dow, which would mean another 400 points down.

Commodities are coming undone also, with precious metals, base metals, energy, oil, softs and grains all weak. The dollar of course is strong, to the surprise of the vast majority of traders, as indicated by surveys taken this fall.

Looking at indexes from other world markets, I see lots of big, rounded tops forming. Things are just slowly rolling over, setting up for another crash some months from now.

This swift drop from a smooth, low vol rally reminds me of two cases from Dow history (I’m sure there are many more): February 2007 and April 1930:

-

-

There is no question that the current climate is closer to that of 1930 than 2007.

-

Probably no posts tomorrow. I’ll be riding the rails.

About these ads

8 thoughts on “Day by day, the case for a top grows stronger

  1. Mike, what about a case for a range-bound market? Say Dow 10,000 +/-500. So much is at stake politically and economically that, undoubtedly, stimulus after stimulus would be used to prop up the economy. The Fed will continue to loan banks money at 0% so they can buy risk assets. As much as you and I disagree with the current management of the US economy, I have to believe that the dishonest folks in Washington are not stupid and have learned how to manage a fall’08 – spring’09 scenario.

  2. They are ignorant of economics, have learned nothing, and all of their actions are making things worse. Bernanke misunderstands the 30s, since it was the state that prevented the economy from recovering like it did from the equally threatening panics of 1907 and 1920.

    I definitely dont see a range-bound market, unless the range is 2000-4000 on the Dow.

  3. Mish had this to say yesterday on the prospects for stocks -

    Two Lost Decades

    Fundamentally, the S&P 500 can easily fall to 500 or below, a massive crash from this point. Alternatively, stocks might languish for years.

    click on chart for sharper image

    The Japanese Stock Market is about 25% of what it was close to 20 years ago! Yes, I know, the US is not Japan, that deflation can’t happen here, etc, etc. Of course deflation did happen here, so the question now is how long it lasts.

    Bulls Dance On Edge Of Cliff

    It’s time to review Hussman on Valuation; Stocks Higher? Bulls Dance On Edge Of Cliff

    John Hussman:

    It’s important to recognize that when I quote probabilities, I am generally using a form of Bayes’ Rule. So when I say, for example, that I estimate a probability of about 80% of fresh credit difficulties accompanied by a market plunge over the coming year, that figure is based on various combinations of historical evidence, and what has (and has not) happened afterward, and how often. As a side note, a “market plunge” in this context need not be a “crash.” In the context of a credit-driven crash and rebound (which is what I believe we’ve observed), a typical post-rebound correction would be about -28%, but even that would take stocks to less than 20% above the March lows.

    That was Hussman’s view. I think the probabilities look something like this:

    * 20% chance of a durable rally
    * 20% chance the market meanders nowhere for as long as 5 years
    * 30% chance of of a hard 25-30% correction
    * 30% chance the bottom is not even in

    Unlike Hussman, I have not done any statistical analysis of my estimates. Certainly his “estimate a probability of about 80% of fresh credit difficulties accompanied by a market plunge over the coming year” is reasonable enough.

    [Note: those probabilities were written in December. The odds of a strong rally now, are less likely, perhaps 10-15% at best]

    Note that Hussman’s 80% probability of a plunge encompasses a plunge where the bottom holds and also where it doesn’t.

    The key for me is that on average it does not pay to be fully invested here, regardless of what the stampede of bulls say. Bear in mind, the bulls were saying exactly the same thing as they are now right at the October 2007 high. I received taunts for several months for my market top call late summer of 2007, about 3% and 3 months early.

    Is the top in now? No one knows, but that is not even the right question to be asking. A far better question to be asking is “Is the bottom in?” Even if it is, a major test coming of that bottom down the road is highly likely and that will gore a lot of overly complacent bulls along the way.

    Fundamental Thesis

    The odds of another huge stock market dip in 2010 or 2011 are huge. The odds of another recession in the next 10 years are also huge. Heck, the odds of double-dip recession in 2010 or 2011 are very substantial.

    Fundamentally, a huge wave of boomer retirement is coming up, and those retirees will be drawing down funds and lowering lifestyles, not contributing and consuming more. Moreover, global wage arbitrage still has not played out and there is huge downward pressure on wages and jobs.

    Credit card defaults are still soaring, and banks are still sitting in hundreds of billions of dollars worth of assets held off the balance sheet. The S&P PE is over 20, a number associated with market tops, not bottoms.

    Structurally, unemployment will remain high for a decade. And finally, consumer attitudes towards debt and risk have reached a secular peak and have turned.

    That is not a backdrop for a huge bull market in equities or a massive bet on inflation either.

    Pension plans better figure this out and act accordingly or they are going to dig themselves an even deeper hole.

  4. I have to correct myself about Munich – my first impression was not a good sample. The city is clean, just not Zurich clean, and it turns out I was seeing the Turkish neighborhood (great burek).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Connecting to %s